India's Only Vertically Integrated Producer of The Red Metal

Ahead of the first tranche of 9.59% disinvestment of government ownership of 99.59% of Hindustan Copper Limited, India’s only vertically integrated producer of the red metal, the company’s share traded in small lots at up to INR 268. When the non government holding was that miniscule, there was no chance of the share price being reflective of company fundamentals. This explained why the government, under pressure to mobilize INR 30,000 crore by way of disinvestment during 2012 to 2013 as part of fiscal deficit management, offered 41% discount for HCL shares over the ruling market price. Even then, the HCL share sale evoked poor response from private institutions. As was anticipated, government institutions like LIC and State Bank came to the rescue of the HCL issue, whose importance lay in kick-starting this year’s disinvestment program.

The first sale of government share could happen only in November-end as New Delhi could not risk a float earlier when the market was in tumult. But what is the lesson for the government from the HCL disinvestment exercise? At HCL floor price of INR 155 measuring the stock’s enterprise value at 24.5 times the company’s earnings before interest, tax, depreciation and amortization (Ebitda), compared with five to 10 times for Coal India Limited and NMDC, private investors found it wise to stay away. As disinvestment in companies like NMDC, Vizag Steel and Nalco happens in the rest of 2012 to 2013, the government should do offer pricing in a way as to ensure that post-listing shares do not sink below the floor. This happened with HCL shares.

Garnering funds by share sale will come to the government’s aid to restrict fiscal deficit to 5.3%. Disinvestment, particularly in a company like HCL with almost total government ownership, should ideally usher in significant improvement in corporate governance, reporting to non-government shareholders and transparency. It is nobody’s case that HCL’s record in any of these is found wanting. But the point remains, as has been the experience of CIL reporting to controlling ministries is one thing and to be answerable to a large body of shareholders, including highly probing funds, is a different proposition altogether.

A private sector company, which made many unsuccessful bids to open a large bauxite mine in Odisha, continues to suffer as much in the hands of foreign funds as domestic and offshore NGOs. They suspect that the proposed bauxite mine will harm environment and deny tribals of their livelihood. So, HCL has entered the wondrous world of shareholder scrutiny, which on occasions could be feral. Wasn’t there an occasion for the UK’s Children’s Investment Fund Management to complain about CIL’s ‘failure to perform their functions with care and skill?’

This point is mentioned for two reasons. First, as HCL remains in a chase to lift copper ore production to 12.4 million tonnes by 2017 to 2018 from last year’s production of 3.479 million tonne it will be expanding capacity of existing mines, selectively reopen mines closed earlier and also open new ones. Almost in every case, irrespective of the mineral mines opening subject to forest and environment clearances and satisfactory resolution of local issues like resettlement of affected people, suffer considerable time overrun. Second, in case HCL mines projects suffer delays for the above reasons, as is the experience of SAIL with Rowghat iron ore mine development in Chhattisgarh or of Nalco with Gudem and Kr Konda bauxite deposits in Andhra Pradesh, then it will be difficult for the copper company to avoid cost overrun. Eight HCL projects are budgeted for INR 3,435 crore. What should, however, be reassuring for shareholders is the company claiming that mining projects are on course and successful bidders for six of these have already been chosen.

The strategy of focussing on copper ore mining and raising production of ore and copper concentrate that led to turnaround of HCL forms the basis of its corporate plan 2020. What particularly came to the aid of the company, which a decade ago was in dire state till the government stepped in with two rounds of capital restructuring, was the closing down of the bigger of its two smelters and refining units at Khetri in Rajasthan. For the reasons small size and antiquated technology - that the Khetri smelter was closed down, the company at an opportune time should decommission the punier smelter at Ghatsila in Jharkhand. When the country boasts of 400,000 tonne and 500,000 tonne smelters, both in the private sector and using technology rivalling the world’s best, what hope is there for HCL’s Ghatsila unit?